Dueling Fools

Fruit of the Doomed
The Bear Rebuttal

By Paul Larson (TMF Parlay)
September 29, 1999

I feel sorry for my buddy Rick. I really do. I honestly can't think of a more thankless job than defending poor Fruit of the Loom. He made a noble attempt at a bullish case, yet after reading his piece I came away as nonplused about the company as before.

Rick first points out that, today, one can get a "great brand at a greater price." Fruit of the Loom may have a nice portfolio of brand names under its wings, but I don't know if even today's drastically discounted price is really a great deal. Yes, the market capitalization is today below $300 million, but it's also worth noting that the company can barely rub two nickels together and has almost $2 billion in total liabilities on its balance sheet. In other words, it is the debt holders that really own the brand names, not the stockholders.

Our Foolish bull then ponders what would happen to the stock if Fruit could get back to profitability levels of 1998. I'll counter with pondering what would happen if the company repeated its earnings of 1997. Look at the historical results and you can decide for yourself whether Fruit's long-term earnings have been anything to crow about:


                Net Income (millions)     EPS  
1999 (6 mo.)      ($11.3)                 NA
1998               $135.9                $1.88
1997              ($487.6)              ($6.55)
1996               $151.2                $1.98
1995              ($232.5)              ($3.07)
1994                $60.4                $1.11
Rick then points out that the most pessimistic analyst is expecting $0.45 in earnings next year. I'll have to remind my chum that forward estimates are just those -- estimates. Between today and next year Fruit has to make it past a fairly severe liquidity crisis, and the stockholders could very well get drenched in the meantime.

Simply said, the company is struggling to pay its bills, and one way firms with such problems get liquidity is to sell equity to its lenders. At today's drastically reduced prices, that would dilute today's shareholders in a big way.

Even if Fruit's fictional top executives do manage to turn the company around, it's not going to be an easy task. My advice to investors would be to avoid the SS Fruit of the Loom -- at least until it has made it past 1999's dire straits of bankruptcy.

Next: Vote Results

Also Check Out the Duel Flashback: Gillette